The impact of Capital Gains Tax in estate planning
19 Oct 2023
Capital Gains Tax (CGT) is one of those terms that often elicits a groan from private clients, but understanding its intricacies can be incredibly beneficial in the long run.
CGT has, after all, a significant influence on your estate planning and the gifting of your assets to loved ones.
This article aims to provide a comprehensive overview of how CGT affects these areas, and what you, as a private client, need to be aware of.
What is Capital Gains Tax?
At its core, CGT is levied on the profit made from selling or transferring an asset that has increased in value.
The tax is calculated on the gain you make compared to the price at which you purchased it, rather than the total amount you receive.
Assets subject to CGT can range from property and shares to collectables like artwork.
The rate of CGT varies depending on your overall income and the type of asset sold.
If you are on a higher or additional rate of Income Tax, you’ll pay:
- 28 per cent on gains from residential property.
- 20 per cent on gains from other assets.
For basic rate taxpayers, your rate depends on the amount you have gained, your taxable income and from where you made your gain.
These are complex calculations that are specific to your personal situation, so it is always advisable to contact a qualified accountant to discuss these liabilities.
CGT in estate planning
When it comes to estate planning, CGT plays a pivotal role.
The objective of estate planning is often to minimise tax liability while ensuring that assets are passed on according to one’s wishes.
Ignoring CGT can result in a substantial tax bill that diminishes the value of the estate left for beneficiaries.
- Holding and transferring assets: The manner in which you hold, or transfer assets can significantly affect your CGT liability. For instance, transferring assets to a trust could trigger a CGT charge, as it is considered a disposal for tax purposes. The same applies when you sell or gift property or shares.
- Use of exemptions and reliefs: Certain exemptions and reliefs can mitigate CGT liability. One common relief is the Principal Private Residence Relief, which generally exempts the sale of your main home from CGT. Another is Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, which can reduce the CGT rate on the sale of qualifying business assets.
Gifting of assets
Gifting is a popular method of reducing an estate’s value for Inheritance Tax (IHT) purposes. However, many people are unaware that gifting can trigger a CGT liability.
- Gifts to individuals: When you gift an asset to an individual, you are generally treated as having sold the asset at its market value. Any gain made on this “sale” may be liable to CGT. However, the person receiving the gift will inherit your original cost base for CGT purposes when they eventually sell or dispose of the asset.
- Gifts to trusts: Gifting assets into a trust is more complex and can result in immediate CGT implications. The establishment of a trust itself is a disposal for CGT purposes, and any gains are calculated based on the market value of the assets being transferred.
- Gift hold-over relief: Gift Hold-Over Relief can be a useful tool when gifting business assets or shares. The relief effectively allows the gain to be “held over” and passed to the recipient. The gain will then be realised when the recipient disposes of the asset, rather than when the gift is made.
Capital Gains Tax is an unavoidable element of estate planning and the gifting of assets.
A nuanced understanding of the tax and its reliefs can significantly impact the effectiveness of your financial planning.
Consulting with a qualified accounting professional specialising in private client matters is crucial for personalised advice tailored to your specific circumstances.
In an area as complex and technical as CGT, ignorance is certainly not bliss. It’s better to be in the know than to be caught unawares with a hefty tax bill due to non-compliance.
To ensure you are protected from CGT, speak to one of our accountants.